How Printing Money Constitutes Theft and Forced Wealth Redistribution

by Kel Kelly
Jul. 18, 2010

[Extracted from 'The Case for Legalizing Capitalism' by Kel Kelly]

An example of historical dollars, which used to actually represent claims on real gold and silver.

When new money is created, it enters the economy—technically— in the form of loans to businesses and individuals. The government gets money by selling bonds, which the Fed later buys, and which gives reserves to new banks, reserves that will back new loans to businesses and individuals. But since those bonds are bought by the Fed for the very purpose of funding the government, government spending is effectively new money entering the economy as well. The receivers of the new money spend it by buying things from others. Then, those who sold goods to the new borrowers take their increased sales revenues and spend the money, in their turn. As the money is spent and re-spent, prices begin to rise from the increase in demand. Once the new round of money has fully flowed through the economy, prices will be higher than before the new money was created. But here is the tricky fact: those who receive the new money first spend before prices rise. Those who receive the money last spend after prices rise. The late spenders and those who did not borrow and spend part of the new money are left with less purchasing power and a devaluation of their assets. Thus wealth is transferred from the last receivers of money to the first. The ones who are hurt most are the poor and the retired and elderly citizens, who live on fixed incomes.

Naturally, as a first receiver of money, government gets to spend new money before prices rise, financing a large portion of its deficit by printing money. Without the central bank, deficits would be impossible because the government would have to rely solely on the amount of taxes it could force citizens to pay. By using the Fed, the government can have all of us subsidize it further by having it gain more income at our expense—the higher costs we pay for goods each year constitutes the amount that we are losing and the government is gaining. This is what is known as the “inflation tax.”

Most government spending consists of social programs that transfer wealth from one group to another—most taxes are not spent on schools and infrastructure and fighting unnecessary wars. Therefore, the higher costs you and I pay for goods and services each year mostly reflect what we are paying to give money to someone else. The receiver of wealth distribution is taking money from citizens through the government’s monopoly printing press. This ultimately causes them to be poorer, not richer. Either way, forcing money away from one group by devaluing their money, and giving it to another group, constitutes theft: a forced tax that no one voted for.

Another group that suffers from the wealth redistribution effects of the government’s inflation is the holders of the government bonds (almost 50 percent of whom are foreigners), bonds which enable the entire process. The money the government owes to holders of its bonds is devalued during the inflation process, allowing the government to benefit from borrowing at the expense of the lenders, who are repaid in money worth less than it was at the time the bonds were purchased.